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September 9, 2021

PE Watch | Latest developments and trends, September 2021

Permanent establishment (PE) domestic law

United States: Extension of High-Tax Exclusion rules to foreign branches and modification of the foreign branch definition

On 25 August 2021, the United States (US) Senate Finance Committee issued a discussion draft to amend certain international tax rules. Among other items, the draft proposes to extend the High-Tax Exclusion (HTE) rules to income of foreign branches. HTE rules allow taxpayers to exclude from their global intangible low-taxed income (GILTI) inclusion items of a controlled foreign corporation’s (CFC) gross-tested income. Hence, high-tax income from a foreign branch of a US corporation would be exempt from tax. Foreign branch income is considered to be high tax if subject to an effective tax rate that exceeds the highest US tax rate (currently 21%).

Further, the discussion draft also modifies the definition of a foreign branch for purposes of the HTE rules and foreign tax credit purposes. Currently, foreign branch category income means the business profits of a US person attributable to one or more qualified business units (QBUs). The draft would remove the QBU requirement, and instead define a foreign branch as activities carried on by the taxpayer that: (i) are not a tested unit of a CFC; and (ii) give rise to a taxable presence under the laws of the foreign country in which the branch is located. As a result, from a US perspective, foreign disregarded entities with no trade or business would generally give rise to a foreign branch.

The provisions are generally proposed to be effective for tax years beginning after the date of enactment. Comments on the draft were requested by 3 September.

PE case law

India: Decision confirming the existence of a Service PE in India

On 12 August 2021, the Indian Tax Appellate Tribunal (ITAT) of Delhi issued its decision No. 1307/Del/2015 on whether the activities of a nonresident created a PE in India. In this case, a tax resident of Norway entered into a business service agreement with a company in India for the provision of various services (e.g., sourcing, marketing, IT, HR), through deputation of the taxpayer’s employees in India.

According to the Norwegian taxpayer, the services were in nature technical services and therefore should be taxed at 10% on a gross basis, relying on the tax treaty between Norway and India. However, the assessing office in India held that the Norwegian taxpayer had a PE in India and thus tax was triggered at the higher rate applicable to a PE on a net basis for the following reasons: i) The employees of the Norwegian company stayed for a total period of 260 days in India, which exceeded the threshold of Service PE included in the tax treaty; and ii) the services rendered by various employees were for the same project. Tax at the higher rate on a net basis as applicable to a PE resulted in higher tax liability for the taxpayer in India.

The Norwegian taxpayer filed an appeal asserting that it did not have a PE in India. In particular, the Norwegian taxpayer contended that the duration of stay of its employees in India with respect to the various projects undertaken, did not exceed six months per project. Further, the Norwegian taxpayer contended that the service orders constitute different projects and the activities cannot be treated as single consolidated activities. The Norwegian taxpayer elaborated that three different types of services are specified in the business service agreement and are independent from each other and also are merely governed by the terms and conditions in the business service agreement. Accordingly, each one constituted a separate project and therefore did not breach the service PE threshold of the tax treaty.

The ITAT found that the activities of the Norwegian taxpayer were interconnected since they were governed by a unified service agreement which sets forth the mutual obligations and its implementation. Further, all activities of the taxpayer were interconnected and none of the activities could stand in isolation from the other activities. Also, no single activity gave rise to performance and could not achieve the purpose of the recipient of the services. Therefore, there was a clear commercial coherence between the activities. The ITAT held that the services pertained to the same project due to the common billing and the common receipt of income which led to the conclusion that the business service agreement was a single contract. Consequently, all the days of presence in India should be aggregated and therefore the threshold for Service PE was met.

PE tax rulings

Chile: Tax ruling on insurance activities

On 23 August 2021, the Income Revenue Service (IRS) of Chile issued ruling No. 2164 to clarify the tax treatment of payments received by an insurance company in the United Kingdom (UK) from an insurance policy for a person in Chile. The ruling provides that one needs to analyze whether the person is a resident of any of the jurisdictions which signed the respective tax treaty. In this case, the insurance company was a resident of the UK. Once that is determined, one needs to consider whether the insurance company has a PE in Chile.

Although the ruling does not determine whether the UK company has a PE in Chile, it provides guidance as to how to determine whether there is an insurance PE in Chile. The treaty between Chile and the UK includes an insurance PE clause which deems the existence of a PE if a nonresident collects premiums in the territory (either Chile or the UK) or insures risks situated therein through a person. One needs to evaluate whether the person insuring risks is an independent agent. For this, the following factors should be considered: (i) the activities performed by the person, e.g., whether the person is subject to detailed control of the nonresident; (ii) who bears the entrepreneurial risk; (iii) how much information the person shares with the nonresident; and (iv) the number of companies represented by the person. Moreover, the IRS has changed its position on an insurance PE by stating that to trigger an insurance PE, it is not mandatory to have a physical presence in Chile.

Denmark: Tax rulings on home office PEs

On 18 August 2021, the Danish Tax Board (DTB) issued a binding tax ruling SKM2021.415.SR to assess whether employees from a nonresident company working from home in Denmark would create a PE in Denmark. In this ruling, a German company hired two sales employees who would be working from home during the COVID-19 pandemic and after the COVID-19 pandemic would work at least 85% of the time from their home offices, respectively. Both employees do not focus on the Danish market but rather on the Austrian, German and Swiss markets. The DTB concluded that both employees do not constitute a PE for the German entity neither during nor after the COVID-19 pandemic. The reason for this conclusion is that the employees are not in contact with Danish customers. Furthermore, the German entity did not instruct any of the employees to work from home in Denmark. According to the DTB, one can reach the same conclusion even if the German entity gets a Danish customer provided that neither of the Danish employees had or have no contact with the Danish customer.

Similar to the above tax ruling, the DTB issued binding tax ruling SKM2021.412.SR dealing with the existence of a home office PE in Denmark. In this case, a Swedish company asked the DTB whether it had a PE in Denmark for having two employees working from home: one creative director involved in the company’s development work and one system developer performing the same tasks as his Swedish peers. The DTB concluded that both employees do not constitute a PE for the Swedish company since the decision to work from home is by the employees and is not instructed by the Swedish company. Further, the fact that both employees work from home in Denmark does not add any value to the business of the Swedish entity. The DTB also noted that the nature of the work was such that it could be performed anywhere since all employees of the Swedish company work from home more than 99% of the time.

Other PE developments

Russia: Guidance letter on interest paid by a PE in Russia

On 3 August 2021, The Russian Ministry of Finance published letter #03-08-13/62064 clarifying the taxation of interest paid by a Russian PE of a foreign company to a foreign lender without any presence in Russia. According to the letter, the interest paid in this case should not be subject to a withholding tax in Russia, considering that loans provided to foreign companies are not currently in scope of Russian withholding taxation. However, the Ministry of Finance noted that due to recent amendments to the Russian Tax Code interest on loans issued to a PE of a foreign company, provided that the loan on which the interest is paid arose in connection with the activities of this PE, would be subject to Russian withholding taxation starting from 1 January 2022.

Taiwan: Update to the regulations on bilateral tax treaties

On 12 August 2021, Taiwan’s Ministry of Finance published order No. 11024511340 in the Official Gazette to amend its regulations on bilateral tax treaties. The Regulations are the general guidelines on the application of Taiwan’s tax treaties. Among other items, the Regulations update the section on PEs to provide the following:

  1. Strengthen the rule to determine a PE: when determining whether a place of business is (geographically) fixed, in situations where business activities are carried out at more than one location, one should consider whether those activities constitute a coherent whole commercially and geographically with respect to that business.
  2. Time threshold for construction PE: the regulations explain how to calculate the days of stay in Taiwan, e.g., whether to aggregate the number of days in case of related or connected projects.
  3. Preparatory or auxiliary activities: the regulations indicate that preparatory refers to those activities of a supplementary nature prior to the execution of the main business activity and auxiliary refers to activities or combination of activities that are not central or important to the overall business activities.

The Regulations came into effect on 12 August 2021.


For additional information with respect to this Alert, please contact the following:

Ernst & Young Belastingadviseurs LLP, Rotterdam

Ernst & Young Belastingadviseurs LLP, Amsterdam

Ernst & Young Solutions LLP, Singapore

Ernst & Young LLP (United States), Global Tax Desk Network, New York